Anglo African Oil & Gas poised for action (LSE:AAOG)

19 Apr 2017

Anglo African Oil & Gas Plc (LSE:AAOG) made its debut on AIM at 20p in March, successfully raising £10m to fund the company’s exciting plan for growth during 2017. The shares have since traded as high as 30p and there is a great deal of anticipation among private investors about what is coming next. Can AAOG now live up these expectations?

AAOG’s first step was to complete the acquisition of Petro Kouilou, an established oil producer in the Republic of Congo. The acquisition of Petro Kouilou gave AAOG a 56% stake in the Tilapia Field, Congo. The remaining 44% share is owned by Congo’s national oil company, SNPC, which recently approved the budget for its share of CapEx at the Tilapia Field.

Tilapia is in a reasonably prolific oil region, with a number of neighbouring fields producing in excess of 5,000bopd. AAOG clearly believes that Tilapia has potential to host such an operation. However rather than taking an oil discovery moonshot at the very beginning of its listed life, AAOG recognized how many companies have failed following this approach and instead focused its energies on a more prudent workover programme of two previously producing oil wells. AAOG’s hope is that this will result in the company producing up to 250bopd within a relatively short period of time and AAOG becoming cash flow positive.

Once AAOG’s financial position is secure it will then switch its attention to two much deeper, higher risk and potentially much more lucrative plays in the Mengo and Djengo sands.

The three-stage play

To develop Tilapia and realise AAOG’s ambitions first needed to put in place all the relevant licenses and permits are in place. This was recently completed and AAOG is progressing with its planned workover programme of two wells. The goal is for AAOG to increase oil production in the company from the current 38bopd to a decent 250bopd. Assuming the oil price remains above $50/brl and the workover programme hitting AAOG’s target at the lower end the company expects to become cash flow positive once it produces 180bopd. To get to this point is budgeted at $300,000.

In other words, AAOG, unlike so many of its peers, has the opportunity to build a genuinely solid business for a minimal outlay.

Once AAOG’s has completed phase 1 it will move onto the second phase, which is targeting the drilling of a new multi-horizon well in the already-producing Mengo sands. AAOG’s share of CapEx for the drill will be $3.5m and success here will increase output to 750bpod. At $50 oil, this will increase revenues to $500k (est $300k profit) per month.

The third stage of the AAOG’s plan will be to extend the well into the Djeno sands where a prospective resource of 58MMbbl of oil has been identified. Oil majors have made significant discoveries in adjacent fields with neighbouring assets producing in excess of 5,000bopd.

Potential Valuation

At 28p AAOG is valued at £14.8million. The market cap suggests a lot has already been priced in for the initial 250bopd target. If that programme fails to live up to expectations then AAOG’s share price could come under selling pressure.

However, the company has been keen to point out that this initial workover programme is meant to be low risk. Both wells have produced historically and the planned improvements appear straightforward.

Assuming that AAOG’s predictions are accurate then this is where the share price could start to offer telephone book multiples, based on the current number of shares in issue. A conservative estimate has calculated that a successful strike at the Mengo sands could result in an increase in AAOG’s valuation by £69million (£1.30 per share) and at the Djengo sands an increase in value of £760m (£14.84 per share). Of course, these sorts of sums rarely result in anything meaningful from an investment perspective, but we all know the sort of calculations the market can often love to get carried away with.

So far the AAOG story has built a decent following among private investors and if this takes root over the coming months we could be on the cusp of another AIM-mania. With a current MCAP of £15m, £6.5m cash to fund development of the assets, and success ratings for stages one to three to be estimated at 100%, 50%, and 25% respectively, there is good reason to believe significant upside is possible over the coming months.

AAOG has strong speculative appeal buying between 25-35p with a target price potentially as high as £1.35 achievable at stage-two with a successful drill of the Mengo Sands. For the more risk-averse there is still a potential opportunity to exploit any rise in anticipation of the drill results.

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

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